How to Determine a Company’s Growth Rate

There are a good many ways to look at a company’s fundamental growth. The most typical are the P/E ratios. Another method seeks to establish the company’s growth rate while others look at net sales. All are, to some degree, helpful but usually do not give us adequate figures to compare one stock with another.

The payout time formula solves this.

This simple formula is nothing more than the number of years it will take earnings per share, compounded at the firm’s current growth rate, to reach the price of the stock. Let’s say the earning per share is Rs.60, the growth rate is 20% per year, and the current price is Rs.1200. It will take about 16 years for the compounded
earnings to equal the stock’s current market value.

let’s take another stock with earnings per share of Rs.40, a growth rate of 15% and current market price of Rs.120 a share. In terms of the annualized growth, this does not appear to be as good a buy. But its payout is only some 9 years! It represents a better buy. The lower this payout figure is, the better a fundamental
buy you have located.